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(AUSTIN) — The two funds that provide retirement benefits and healthcare to public school teachers and other state employees may need reforms to maintain solvency in the future, according to members at a hearing of the Senate State Affairs Committee Wednesday. "It's just a cold, hard fact that we can't keep doing things the way we're doing it," said Flower Mound Senator and Finance Committee Chair Jane Nelson about funding strategies for the Teachers Retirement System and Employees Retirement System. "We can't keep going down this path."

Funding for TRS and ERS comes from a few different sources. Teachers and state employees pay in some, the state pays in some, but more than half of the retirement fund income comes from returns on investments. ERS and TRS manage funds totaling in the billions of dollars and they invest these funds into the market, into bonds and other investment instruments. The state is limited by the Texas Constitution as to how much it can pay into the systems; no more than 10 percent of the aggregate salaries of all active employees. Investment returns can vary year to year, depending on the performance of the national economy. Without appropriating cash directly to cover shortfalls, there's only one other area to balance the ledger, said ERS Executive Director Porter Wilson. "The equation's not overly complex," he said. "If you're not going to put in new revenue and you're convinced the 10 percent [cap] is a hard cap…there's only one place to go and that's the benefit design side and making benefit design changes."

Later this month, the TRS board will meet to consider changes to the fund's return assumptions. Because pension funds are budgeted over decades, analysts try to predict what the average return on investment for the pension funds will earn year-to-year. Right now, for TRS, an eight percent return is used for actuarial purposes. Over the last 20 years, however, investments have only returned about seven percent. This gap between anticipated and actual returns is where potential unfunded liabilities arise.

TRS board members will consider on April 20th whether or not to reduce this assumption down closer to the observed past returns. This will not mean immediate changes to current benefits, according to TRS Executive Director Brian Guthrie. "There's a lot of misinformation that has gotten out there," he said. "We get a lot of calls from our members who believe that the board taking an action… will make some significant impact on their lives immediately, and that's just not the case. This is not significant in terms of their annuity check, it is a significant event in terms of us determining the long-term health of our pension fund." The ERS board already voted to reduce that fund's return assumption from eight to seven-point-five percent last August, and will consider further changes in two years.

Session video and all other Senate webcast recordings can be accessed from the Senate website's Audio/Video Archive.